Welcome to the Currency War, Part 14: Russia, China, India Bypass the Petrodollar

As it tries to punish Russia for the latter’s dismemberment of Ukraine, the West is discovering that the balance of power isn’t what it used to be. Russia is a huge supplier of oil and gas — traded in US dollars — which gives it both leverage over near-term energy flows and, far more ominous for the US, the ability to threaten the dollar’s reign as the world’s reserve currency. And it’s taking some big, active steps towards that goal. As Zero Hedge noted on Tuesday:

Last week we reported that while the West was busy alienating Russia in every diplomatic way possible, without of course exposing its crushing overreliance on Russian energy exports to keep European industries alive, Russia was just as busy cementing its ties with China, in this case courtesy of Europe’s most important company, Gazprom, which is preparing to announce the completion of a “holy grail” natural gas supply deal to Beijing. We also noted the following: “And as if pushing Russia into the warm embrace of the world’s most populous nation was not enough, there is also the second most populated country in the world, India.” Today we learn just how prescient this particular comment also was, when Reuters reported that Rosneft, the world’s top listed oil producer by output, may join forces with Indian state-run Oil and Natural Gas Corp to supply oil to India over the long term, the Russian state-controlled company said on Tuesday.

Rosneft CEO Igor Sechin, an ally of President Vladimir Putin, travelled to India on Sunday, part of a wider Asian trip to shore up ties with eastern allies at a time when Moscow is being shunned by the West over its annexation of Crimea. Rosneft said it had also agreed with ONGC they may join forces in Rosneft’s yet-to-be built liquefied natural gas plant in the far east of Russia to the benefit of Indian consumers.

We just have one question: will payment for crude and LNG be made in Rubles or Rupees? Or in gold. Because it certainly won’t be in dollars.

Rosneft, which is increasing oil flows to Asia to diversify away from Europe, did not provide any additional details but said it had discussed potential cooperation with Reliance Industries and Indian Oil.

It did not have to: it is quite clear what is going on. While the US is bumbling every possible foreign policy move in Ukraine (and how could it not with John Kerry at the helm), and certainly in the middle east, where it is alienating Israel and Saudi just to get closer to Iran, Russia is aggressively cementing the next, biggest (certainly in terms of population and natural resources), and most important New Normal geopolitical Eurasian axis: China – Russia – India.

There is only one country missing – Germany. Because while diplomatically Germany is ideologically as close to the US as can be, its economy is far more reliant on China and Russia, something the two nations realize all too well. The second the German industrialists make it clear they are shifting their allegiance to the Eurasian Axis and away from the Group of 6 (ex Germany) most insolvent countries in the world, that will be the moment the days of the current reserve petrocurrency will be numbered.

To understand why trade deals between Russia, China and India are potentially huge, a little history is useful: Back in the 1970s, the US cut a deal with Saudi Arabia — at the time the world’s biggest oil producer — calling for the US to prop up the kingdom’s corrupt monarchy in return for a Saudi pledge that it would accept only dollars in return for oil. The “petrodollar” became the currency in which oil and most other goods were traded internationally, requiring every central bank and major corporation to hold a lot of dollars and cementing the greenback’s status as the world’s reserve currency. This in turn has allowed the US to build a global military empire, a cradle-to-grave entitlement system, and a credit-based consumer culture, without having to worry about where to find the funds. We just borrow from a world voracious for dollars.

But if Russia, China and India decide to start trading oil in their own currencies — or, as Zero Hedge speculates, in gold — then the petrodollar becomes just one of several major currencies. Central banks and trading firms that now hold 60% of their reserves in dollar-denominated bonds would have to rebalance by converting dollars to those other currencies. Trillions of dollars would be dumped on the global market in a very short time, which would lower the dollar’s foreign exchange value in a disruptive rather than advantageous way, raise domestic US interest rates and make it vastly harder for us to bully the rest of the world economically or militarily.

For Russia, China and India this looks like a win/win. Their own currencies gain prestige, giving their governments more political and military muscle. The US, their nemesis in the Great Game, is diminished. And the gold and silver they’ve vacuumed up in recent years rise in value more than enough to offset their depreciating Treasury bonds.

The West seems not to have grasped just how vulnerable it was when it got involved in this latest backyard squabble. But it may be about to find out.

So what have you bought lately from that great oligarchy in Russia lately? That’s right nothing. They produce nothing of any consequence to the open market therefore their economy is limited as public wages stagnate just like our does and public outcries against the corruption rise.

Income inequity is growing not declining in the world as capitalism, whether it’s in the case of Russia, China, India, or here, is growing because capitalism does not sustain itself unless the wealthy are maid to pay the taxes to support the infrastructure it uses and is failing all around us.

It’s people who keep making excuses, like it’s the poor people, or it’s taxes and regulations, that are not dealing in reality of another 1929 depression, and that my friends was made worse by a lack of aggregate demand, ended by large scale government investments in infrastructure, putting people back to work and regulation of the banks.

What we are seeing is China in the position that the US was in after WWI making the same mistakes we made, and the result of that was WWII. A beggar thy neighbor economy and a lack of demand from not sharing the wealthy with the working class. Will the war hauwks in DC start WWIII just like Germany did?

As Herbert Hoover took office after the depression started as President he stated, “The only problem with capitalism is the capitalists. They’re to damn greedy.”

Chris

Dan, you are absolutely right about Russia, but absolutely wrong about capitalism and it being the source of our problems. Capitalism is, essentially, economic freedom. An entrepreneur comes up with an idea to employ capital (land, equipment, labor, etc) to make a profit, and that is the catalyst that creates jobs. The more entrepreneurs we have, the more jobs we have. The more jobs we have, the higher demand for labor we have, which pushes wages and working conditions up. Competition among entrepreneurs increases the quantity, quality and variety of goods and services that are available for the people to buy, and increasing productivity (people getting better and faster and more efficient at whatever their job is) leads to steadily falling prices. All of that combines to increase the standard of living among the people. It’s easy to forget that the entire point of an economy should be to increase the peoples’ standard of living. What is happening in America today is that entrepreneurs are doing their business calculations and realizing that, because of all of the taxes and regulations, it’s simply not worth it to start or expand a business. The government has made everything too expensive, too complicated and too time-consuming. THAT’s why our economy is in the toilet.

As for income inequality, government regulations create a barrier to entry for small businesses and smaller entrepreneurs, so the big corporations (who lobby for those regulations) can protect themselves from competition. This allows them to spend money very inefficiently on giant pay and bonuses for executives, while the lack of demand for labor – caused by the suppression of the smaller entrepreneurs – keeps their labor costs (wages) low. So, since we have such a low level of entrepreneurial job creation, people at the bottom suffer while people who own stocks and real estate benefit from the Fed’s QE-induced inflation of those assets. THAT “crony capitalism” system where government policies give the advantage to the rich and big corporations is what creates the wealth disparity.

And the great depression was not caused by a lack of “aggregate demand”, and massive government spending DID NOT end the great depression (that is the Keynesian myth). The great depression was a simple bubble (too much money had been loaned to foreigners, who then bought American exports, and too much credit had been issued, because interest rates had been too low for too long, so people had borrowed money to buy stocks. Stocks bought on margin was 12% of GDP in 1929. 12% of GDP!), and that bubble popped and that was made much worse by government interventions (tax increases, tariffs that raised prices, wage controls that kept wages too high) that were designed to prevent the bubble from fully popping. THAT just extended the misery and caused more malinvestment, just like today.

Standards of living were terrible from 1930 to 1945 (WW2 did not end the depression either – there was rationing, shortages, price controls, generally the WW2 years in America were not marked by happiness and prosperity!), and all the Keynesians were terrified that the economy would crash and unemployment would soar after the war because of the sudden drop in government war spending and all the soldiers flooding back into the workforce. But the exact opposite happened: government spending dropped by more the 50% and the economy experienced the greatest boom in American history for the next 20 years.

Capitalism isn’t the problem, government is the problem. When people are free, free FROM too much government, that is when we experience prosperity that is widely shared among all the people.

Bruce C

Well said. Thank you.

Dan

Too big to fail is the problem not big government. Who benefits form zero percent interest right now. Business should be booming. aggregate demand is the problem because the consume debt plus small business debt will not make an economy. Since the 70’s wages have stagnated, so the public used used debt to make up the difference and the only difference from now and before the depression is that credit wasn’t so available to home owners and the workers. China is now where we were after WWi and will fail just like we did because the wealth is not being shared to create a middle class just like it was here. It’s a history lesson not an economics lesson.

Bullwinkle

Tell me, do you think the US will be slapped down willingly and meekly, or will it look to go down with fists a flyin? Unfortunately the fists could be uranium enhanced and bad for a lot of people’s health

MacFly1

Since we’ve been sold out by the traitor Obomber, we won’t have that chance when they’re invited right in to the country. Fists will eventually fly, though. Both sides probably die. Might be a few million left if that.

The Greatest freedom

The Russian government has announced that officials stopped using iPads, a NSA tool.
They are also developing a new cardpayment solution, or a new CryptoCurrency..Say goodbye to hilarious, hidden credit card fees and the World dominance of VISA..

AimeeJStrong

my Aunty Julia got silver Volkswagen Beetle
Convertible by working parttime off of a home computer… Look At This

It seems only a matter of when rather than if the dollar and the U.S. military might it supports will fade into the background. Step-wise fashion over the next 2 decades. What will happen to the U.S. when the EBT cards aren’t recharged the beginning of the month? The U.S. government will then have to deal with domestic problems and draw back on its military presence. China and Russia taste blood.

F0ster

The EBT cards will always work and they will be in the hands of millions more. Only issue will be you won’t be able to buy a stick of gum with the devalued dollars.

Justin Case

That will be a glorious day, the day when the takers can no longer take and yet have no skills to make a living from. That will be Karma’s way of telling them to eff off and die.

pipefit9

My guess is that the food stamps will be issued for quite a while longer. The farm states are massively over represented in the US Senate, and those folks want as many markets for their products as possible. But I agree that it will take a lot more stamps to buy the same basket of groceries, as consumer inflation accelerates.

The problem is health care. It is expensive to provide. That wouldn’t be a problem if the USA was a country producing massive amounts of wealth. Unfortunately, printing dollars is not the same thing as creating wealth. So we have a bankrupt medicare trust fund, a bunch of aging boomers on the cusp of being eligible for medicare, a rock bottom savings rate, a massively overweight, poor diet population, etc.

I’m surprised few people are talking about the drought, especially in California, as a catalyst for a big CPI spike. The price of meat is already near an all time high. Just a modest worsening of the drought situation in and around Iowa will make this situation much worse.

The yield on the 10-year treasury bond ($tnx) does not appear to have priced in any significant possibility of drought induced inflation run. In fact, it appears to have priced in fairly normal rainfall across the entire grain belt for the coming growing season.

fallingman

Forgive me for pointing it out, because the story is spot on, but If I might, the word is REIGN not REIN … dollar’s reign.

The mistake on this pesky homonym is usually made the other direction, substituting reign for rein ,,, reign in instead of rein in. I must see the wrong word used five times a week.

Justin Case

Thank you Mr. Spelling Nazi, I feel safer and more content knowing that nothing in life is too trivial for you to pass by. Your attention and commitment to the subject of spelling has made life for everyone on Earth better and your contributions are now noted. America and the world t large, salutes you. And to you sir, I raise my middle finger.

transumer

Feeling better now?

Justin Case

Yes :o)

fallingman

Excellent. I love to be saluted. But that’s a strange salute. Shouldn’t you raise your hand smartly to your eyebrow?

See, I can be a salute Nazi too.

Jesus pal, just pointing out to a professional writer as nicely as possible that he’s got an error in his copy so he’ll be aware the next time he uses the phrase. It’s a courtesy, not a criticism. I don’t give a damn if he spells it justincaseisanasshole.

Now go take your blood pressure pills before your head explodes. On second thought … don’t.

ferventspirit

“Spelling Nazi”? Because someone is interested in maintaining a modicum of integrity in holding forth the correct spelling and grammar – that makes him a Nazi? This was pointed out to one who is a professional writer who makes his living by writing (which necessarily involves spelling and grammar). I am sure if you took your car to a mechanic to be repaired and he forgot some minor thing you would be quick to point it out, and possibly in nowhere near as polite and respectful terms as ‘fallingman’ did in his post.

PaperIsPoverty

It’s not particularly respectful to assume that someone is unaware of the difference between reign and rein, rather than assuming, as is surely the case, that it was a simple typo.

fallingman

But it’s not a “typo.” A typo is when you spell out tpyo when you mean to spell typo. it’s a mistake, one that we all can easily make. I was simply pointing out in what I thought was a respectful manner that this one got by him so he can be aware next time.

Obviously, Mr. Rubino knows the difference. I made no assumption he didn’t. If it sounded like it, that’s on me,

I’m sorry I mentioned it.

Justin Case

Ok, so it can not be a typo because you so. Yea, that makes all kind of since. The guy who wrote the story left off a “g” and you think he did on purpose and with the intent to perturb you? Oh no, far be it for me to contradict the great mind reader “failingman” as he knows the evil intent of the author.

And what exactly is that evil intent you may ask? Well, It is to infect the minds of the curious, destroy them and confuse them so they are mindless beings dependent on government. Oh wait, no that is the public school system.

The writer gets paid to make S#!T up on a daily basis and holds the title of professional writer. What the heck do you do with you’re life besides troll around the internet with you’re proverbial red pen in one hand and your…. ur ah, you know… in the other?

MacFly1

Good. Now go buy some gold, beans, and lots of bullets.

Nikki

O well!… the letter G is missing. Of course it’s not a typo… 😛
Is that the only thing that impressed you in the whole article?

Nikki

You are Nazi too. Why to divert our attention from the article? If this topic isn’t interesting to you – what are you doing on this page? I guess, just to hunt for small, irrelevant mistakes that will normally be overlooked and then… attract attention to yourself and grow in your own eyes. WHO CARES about minuscule typo when such an important and interesting topic is explored and explained in detail. Be grateful that there is someone as knowledgeable as Mr Rubino who generously shares his knowledge with us. You’ve read his article, you’ve criticized him, but didn’t even mentioned a word about what really matters – the money, gold and clueless, stubborn politicians.

ferventspirit

Right on. Another one is the misuse of the word ‘loose’ for ‘lose’. I cannot even begin to count how many internet writers and posters mix those two up.

http://DollarCollapse.com/ John Rubino

Thanks for pointing that out fallingman. It’s actually the second time in the past few months that I’ve made that particular mistake (I do know the difference but my fingers aren’t always cooperative). The nice thing about web publishing is that mistakes once discovered can be fixed.

fallingman

Thanks John. Respectfully submitted. It’s an easy mistake to make. I make mistakes with they’re, their, there all the time. Not like I don’t know the difference . Homonyms are just problematic. Didn’t mean to set off a little storm over something this unimportant. Apologies for taking the focus off the important story.

This is a good chance to say thanks for what you do. I have great respect for you and your work and am always glad to get your insights.

Nikki

You should have started with this…

MacFly1

I’ll take financial guy’s occasional English mistakes over English teacher’s financial advice.

Under liberalism the three dynamos of creditism, corporatism, and globalism, supported multiple economic systems, such as crony capitalism, European Socialism, Greek Socialism, and clientelism, which produced global growth.

But under authoritarianism, the singular dynamo of regionalism supports only regional economic fascism, which produces regional security, stability and sustainability. News reports indicate this future direction: ZH posts Russia To Create Own National Payment System In “Bid To Reduce Dependence On The West”.

Liberalism, defined as freedom from government, was the age of inflationism with the Creature from Jekyll Island ruling the Milton Friedman Free To Choose Floating currency system, to set the investor free to pursuit risk based upon his investment profile; some chose to invest in Small Cap Pure Value Stocks, RZV, and Small Cap Growth Stocks, RZG, using margin credit and were greatly rewarded.

Now in the age authoritarianism, Jesus Christ has given the Rider on the White Horse, the bow without any arrows, that is the bow of economic sovereignty, seen in Revelation 6:1-2, to effect global coup d’etat, to establish the Beast Regime of Revelation 13:1-4, to rule in diktat money, to establish regional security, stability, and security, via regional fascism, to deal with the destructionism of unwinding currency carry trade investments and debt trade investments.

Bruce C

The Zero Hedge article cited above asks a profound question:”will payment for crude and LNG be made in Rubles or Rupees? Or in gold. Because it certainly won’t be in dollars.”

(By the way, in the spirit of critiquing writing errors, “w” should be capitalized. But I digress…)

The answer is not as simple or as obvious as one might infer. My guess is that it will be in Rubles because that will strengthen the currency which is what the Russian economy needs right now. That would also help offset the recent economic sanctions from the West for the annexation of Crimea.

However, that may just be wishful thinking on my part, wanting to see some Western/Deep-State comeuppance. And contrary to websites like this one, the US dollar is still not totally useless. After all, not only is oil globally priced in dollars, so is gold. The fact that so many countries haven’t been – and still aren’t – exchanging dollars for gold as fast as they can really makes me wonder what they are thinking. India and China have been, however, which makes sense to me, but I think they do it for the same reasons I have – as a form of savings and wealth preservation. I don’t think they ever expect – or would be willing – to “spend it”, as in purchasing oil or anything else with it, at least under normal circumstances. Especially now, in this period of highly distorted and manipulated markets. Or, in other words, when the price of gold is as low as it is. I believe that purchasing anything with gold now, under present circumstances, will prove to be a major mistake in retrospect. So much so that it isn’t even practically possible for international trade at this time. That is why I don’t think Russia will demand payment for its energy resources in gold. Russia’s economy is practically wholly based upon its oil and gas exports. It sells about $300 billion worth each year mostly to Europe. Well, $300 billion is equivalent to about 7,000 tons of gold at today’s prices. There is only about 25,000 tons of above-ground refined gold in the entire world and the US is supposed to have about 8,000 tons of it, and (I think) Italy (of all places) supposedly has the “second most” at around 4,000 tons, and Europe collectively has about 10,000 tons. Obviously, no country is going to spend its entire gold reserves for a few years (or months) on oil and gas, or anything else, unless they really have to. Fortunately, we’re not there (yet? Yikes!) So, either Russia has to be willing to accept a lot “less” for its exports or gold is going to have to be priced a hell of a lot higher than it is now. I think it eventually will be, for reasons like this and others, but it’s going to take time and may (will?) be very disruptive.

Bruce C

After posting this comment I realized a few errors. The total amount of gold held by countries/central banks is more like 31,000 tonnes (metric tons), not 25,000, and – more importantly – the total amount of refined gold is about 165,000 tonnes. Supposedly, in 2008, CBs held only about 18% of all the world’s gold, and 52% is in jewelry, 16% in bars and coins (private investments), 12% is used by industry, and 2% is “unaccounted”. Also, Germany supposedly has the “second most” amount of gold at about 3,400 tonnes (Italy has about 2,400).

Neverthless, my main point still holds – that gold is not priced high enough right now to fund international trade.

Joe Shmo

One thought on your gold holding “estimates”… re-hypothocation… that gold isn’t where we think it is, and isn’t owned by who holds it. 7 years to get Germany’s gold repatriated? No way they have the gold that they say they have. Any of them. And then there’s those pesky gold leases… I do agree with your main point, especially since we DON’T know who owns what gold and where the heck is it?

oz

The Rothschilds own it and if I had to guess, it’s in Switzerland. Why Switzerland? That’s where these goons hang out. It’s their safe haven where everyone is armed and trained to shoot, the country is always neutral and never in any wars and they actually have this thing called Sovereignty. What a concept.

LoungeLizard

My guess on what currency China will use to buy Oil and Gas will be, is, surprise surprise – The US Dollar. It’s the elephant in the room. Why subject your own currency to any more potential (rigged) international exchange speculators when you (China) can just dump billions of USD$ onto the open market in exchange for a valued commodity. Hell, why not just exchange all the treasury bonds you’re holding as well. Then Russia, with it’s newly acquired Dollar “wealth”, starts exchanging it for European goods and services, all the while talking Euro’s in return as payment for energy. Europe, finding itself beginning to get flooded with cheap USD$, then, in-turn, starts pushing the USD$ back on its originator. Ergo – all the cheap, inflated US paper begins to find it’s way back home (at much reduced international value). The USfed has, for far too long, abused it’s position of creator of the reserve currency. The world is now awash with toxic US Dollars, and, simultaneously, the world is sick of US imperialism. Do away with one and you’ll do away with the other.

Bruce C

China would most likely spend its US dollars initially to buy Russian energy in any case. The difference is whether or not Russian energy companies want to accept those dollars directly. If Russia wants to by-pass the “petrodollar” and strengthen its own currency then China would have to buy rubles with those dollars first (just like everyone has to buy dollars first to buy oil now). It’s not that the dollars would disappear they would just become more of a hot potato. Also, importantly, for this to work China would also have to agree to accept rubles as payment for its exports to Russia too. It’s the establishment of two-way transactions that would by-pass the petrodollar.

MacFly1

The Russian speaking Merkel has already made back-door bartel deals with Russia. Petrodollar is finished!

Matt Brinck

Darkness can not withstand the light of day…all evil will vanish

Jonus Hk

This article is tainted with political bias and hackery. The comment about Kerry was out of place and unnecessary. The final statement about the West not grasping how vulnerable it is implies that the China Russia gas deal would not have happened had the West not responded negatively to Russia’s annexation in the Crimea. Phooy! The China deal has been in the works for many years.

While the surface of the argument seems all too real and valid, there are a few points that need to be made which might forestall this “doomsday scenario”.
First, the pipeline to feed all that LNG to China from Russia has not been built, and will take years to complete. I’m unaware of an “oil” deal between China and Russia being inked recently, just LNG.
Second, the amount of LNG China agreed to buy is less than 40% of what Russia sells to the EU, meaning Russia can’t afford to cut supplies to the EU and replace them with sales to China. Russia is as dependent upon the EU as they are dependent upon Russian LNG, especially since more than 52% of the federal revenue in Russia is directly tied to oil and LNG sales in the form of taxes and tariffs, so Moscow can ill-afford to cut its own throat by leaving the EU in the dust, or insisting they play Russia’s game on Russia’s terms.
Third, the recent trade agreement between India and the US could likely herald more and deeper trade bonds between the two countries, meaning there could easily be some leverage to prevent, or at least give good reason for reconsideration, India from getting too cozy with Russia.
Fourth, the overall economy of China, while certainly massive and growing, is almost as perilous as the US. Though it lacks the same percent to GNP of debt as the US, it isn’t as sound as many would think. If it stalls, or even teeters more on collapse in the near future, prior to “killing off the petro-dollar”, all bets will be off and it will be anybody’s game, except maybe Putin’s, since he lacks the clout to dictate too much to anyone at the moment.

John Rubino is an analyst and investment advisor with Bearing Asset Management, 208-874-8010, which strives to both protect clients from the coming financial crisis and position them for the opportunities that will be available at the bottom.